Earnings Report /
Egypt

Cairo Poultry: 2Q21 – Commodity prices drive revenue growth but pressure margins

  • Top-line grows on the back of higher feed and processing prices

  • Soaring commodity prices squeeze margins and pressure bottom-line for the quarter

  • Surging commodity prices blur 2021 outlook

Al Ahly Pharos Securities Brokerage
16 August 2021

Top-line grows on the back of higher feed and processing prices, accompanied by a rise in broiler chicks and live bird volumes

POUL reported 1H21 results. Top-line grew by 18.5% YoY, to register EGP2,426 million. On a quarterly basis, 2Q21 top-line came in at EGP1,265 million, higher than our estimate of EGP1,230 million, rising by 26.5% YoY and 8.9% QoQ. Top-line performance was primarily driven by the following:

  • Feed prices jumped by 31% YoY in 1H21, reflecting the surge in global commodities prices. On the contrary, feed volumes fell by 13% YoY over the same period due to a slowdown in demand across the 3 feed sectors (cattle, poultry, and aqua feed), where cattle feed volumes witnessed the sharpest drop of 27%, while poultry feed volumes declined by 7%.

  • In the poultry segment, prices of parent chicks grew by 38% YoY in 1H21 to reach its normal level of EGP63/ chick, up from EGP46/ chick during 1H20. The increase in price came as a result of lower rearing activities, in addition to market recovery from the repercussions witnessed in 2020.

  • Prices of broiler chicks decreased by 33% YoY in 1H21, reaching EGP6.7/chick. This was attributed to lower demand as farmers are refraining from growing poultry due to the surge in input prices, in conjunction with an increase in supply, where volumes jumped by 89% YoY in 1H21. Such increase in volumes was driven by favorable rearing conditions.

  • Live bird prices stabilized at EGP25/kg during 1H21, mirroring 1H20. Meanwhile, volumes climbed by 68% YoY, which can be attributed to the group’s strategy of shifting more volumes to the external market instead of intercompany sales.

  • In the processing segment, the group directed its sales strategy towards the most profitable and higher price products. As a result, ASP of Koki rose by 15% YoY in 1H21, stemming from changes the sales mix, as well as the low prices of live birds. On the other hand, this has led to a 16% YoY decrease in volumes in 1H21, where processing volumes dropped by 57% YoY.

Soaring commodity prices squeeze margins and pressure bottom-line for the quarter

GPM contracted by 4.0pps YoY in 1H21, registering 10.9%, with a gross profit of EGP264 million (-13.1% YoY). In 2Q21, GPM recorded 8.8%, down 4.4pps QoQ and 8.9pps YoY. Accordingly, gross profit for the quarter came in at EGP111 million, down 27.6% QoQ and 37.3% YoY. The downturn in gross profitability came as a result of the surge in global commodity prices, which resulted in a 24% YoY rise in COGS in 1H21, noting that the jump in raw materials costs cannot be fully passed to consumers through the end-price due to weak purchasing power in the market.

Consequently, EBIT margin recorded 4.4% in 1H21, implying a margin contraction of 3.5pps YoY, with an EBIT of EGP108 million (-33.5% YoY). On a quarterly basis, EBIT margin dropped by 2.9pps QoQ and 8.3pps YoY, to record 3.0% in 2Q21, reflecting an EBIT of EGP38 million (-44.3% QoQ, -66.2% YoY).

In turn, the drop in margins trickled down to attributable net profit, which dropped by 57.3% YoY and 46.9% QoQ in 2Q21 to stand at EGP27.5 million. Attributable NPM for the quarter contracted by 2.3pps QoQ and 4.3pps YoY to record 2.2% in 2Q21. On a 1H21 basis, attributable net profit grew by 2.6% YoY to register EGP79 million, translating to a NPM of 3.3% (-0.5pps YoY). The slight growth in 1H21 bottom-line can be primarily attributed to a 50.7% YoY drop in net interest expense, owing to the 300-bps rate cut by the CBE in March 2020.

Surging commodity prices blur 2021 outlook

Given the global surge in commodity prices (which started in 4Q20), the poultry market is expected to incur further volatility in 2021, noting that POUL is unable to pass the full increase in raw materials’ costs to consumers. As a result, management expects further instability with respect to the ASP, which would be contingent on supply disruptions. Moreover, demand for feed and chicks is adversely impacted by such uncertainty. As for the processing segment, performance improvement relies on recovery in the economy alongside an increase in purchasing power. We believe that seasonality should pave the way for POUL to witness better performance in 3Q21, as the summer season and the consequent pick-up in the hospitality sector boost demand. Yet, this is expected to be followed by a weaker performance in 4Q21, where such time of the year is tied to weaker sales, a slowdown in the hospitality sector, and higher mortality rates of live birds.

POUL is trading at a FY21f P/E of 9.7x and EV/EBITDA of 3.4x.